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10 Cases of How Competition in Health Care Lower Costs and Raise Quality Outcomes

This lack of competition for patients has a profound effect on the quality and cost of health care. Providers typically do not disclose prices prior to treatment because they do not compete for patients based on price. Payments are usually not made by patients themselves but by third parties — employers, insurance companies or government. But according to Devon M. Herrick, Ph.D., a senior fellow with the National Center for Policy Analysis, in health care markets where providers do compete for patients, not only do prices come down, but outcomes improve.

Long before a patient enters a doctor’s office, third party bureaucracies have determined which medical services they will pay for, which ones they will not and how much they will pay. The result is a highly artificial market plagued by problems of high costs, inconsistent quality and poor access. In addition, critics complain about fragmented care, uncoordinated care, failure to use simple technology (including the telephone, e-mail and the Internet), lack of electronic medical records (EMRs), the absence of safety-enhancing software, the lack of adequate patient education and problems related to rationing care by waiting.

Can the market for medical care be different? Interestingly, in health care markets where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. And because they are not trapped in a system that pays for predetermined tasks at predetermined rates, providers are free to repackage and re-price their services — just like vendors in other markets. It is primarily in these direct-pay markets that entrepreneurs are creating many innovative services to solve the very problems about which critics of the health care system complain. In fact, these solutions are usually a necessary part of the entrepreneurs’ business models.

What follows are 10 examples.

Cosmetic Surgery. Cosmetic surgery is rarely covered by insurance. Because providers know their patients must pay out of pocket and are price sensitive, patients can typically (a) find a package price in advance covering all services and facilities, (b) compare prices prior to surgery, and (c) pay a price that has been falling over time in real terms — despite a huge increase in volume and considerable technical innovation (which is blamed for increasing costs for every other type of surgery).

Laser Eye Surgery. Competition is also holding prices in check for vision correction surgery, and laser surgeons compete on quality as well. Recent quality improvements include more accurate correction, faster healing, fewer side effects and an expanded range of patients and conditions that can be treated. For instance, rather than traditional Lasik surgery, patients can pay $200 to $300 more per eye for the newer, Wavefront-guided Lasik.

This work/research was funded by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the Grantee, the National Center for Policy Analysis.

Laboratory and Diagnostic Testing. Patients can order their own blood tests without a doctor’s appointment and compare prices at different diagnostic testing facilities. Prices are 50 percent to 80 percent lower than identical tests performed in a hospital setting. These services lower the patients’ time costs as well as money costs. In many cases, the results are available online within 24 to 48 hours.

Price Competition for Drugs. Walmart became the first nationwide retailer to aggressively compete for buyers of generic drugs by charging a low, uniform price — $10 for a 90-day supply. In many cases, patients with drug coverage have found the cash price at Walmart is lower than their health plan’s copay at conventional pharmacies. Other chain drug stores have responded with their own pricing strategies.

Price Competition for Drugs over the Internet. Rx.com was the first mail-order pharmacy to compete online in a national market for drugs. To compete with local pharmacies, they offer lower costs and ore convenient service, including free home delivery. They also compete on quality. For instance, high-volume mail-order pharmacies have much lower dispensing error rates than conventional pharmacies. Online mailorder pharmacies have thrived on the business model of improved quality, lower cost and greater convenience.

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